By Caroline Valetkevitch
NEW YORK (Reuters) - The S&P 500 and Nasdaq posted their biggest daily percentage gains since April 27 on Tuesday as softer-than-expected inflation data supported the view that the Federal Reserve may be done raising interest rates.
The small-cap Russell 2000 index jumped 5.4%, outperforming the broader market, while the rate-sensitive S&P 500 real estate sector gained 5.3% and utilities rose 3.9%. All three registered their biggest daily percentage increases since Nov. 10, 2022.
Data showed U.S. consumer prices were unchanged in October as Americans paid less for gasoline, and the annual rise in underlying inflation was the smallest in two years. In the 12 months through October, the CPI climbed 3.2% - below economists' estimates - after rising 3.7% in September.
"The clear catalyst was the softer-than-expected inflation report," said Craig Fehr, head of investment strategy at Edward Jones.
"Getting some softer inflation readings provided markets some additional comfort that the Fed isn't going to have to put in place a significant amount of additional restrictive policy to continue to bring consumer prices lower."
Since March 2022, the Fed has hiked its policy rate 525 basis points to combat high inflation.
The Dow Jones Industrial Average rose 489.83 points, or 1.43%, to 34,827.7; the S&P 500 gained 84.15 points, or 1.91%, at 4,495.7; and the Nasdaq Composite added 326.64 points, or 2.37%, at 14,094.38.
Also, the KBW regional banking index rose 7.5% in its biggest daily percentage rise since January 2021.
"It's difficult with higher rates with the commercial real estate on their balance sheets," said Quincy Krosby, chief global strategist at LPL Financial (NASDAQ:LPLA) in Charlotte, North Carolina.
Expectations on the Fed cutting rates next year also shifted following the day's data. U.S. rate futures on Tuesday priced in a 65% chance of a rate cut in May, compared with 34% late on Monday, according to the CME's FedWatch tool.
Investors also focused on negotiations by U.S. lawmakers over a funding bill as they face an end-of-week deadline to fund the federal government.
Among individual stocks, Snap Inc (NYSE:SNAP) shares jumped 7.5% following news that Amazon.com (NASDAQ:AMZN) will allow Snapchat users in the United States to buy some products listed on the ecommerce company directly from the social media app.
Home Depot (NYSE:HD) gained 5.4% after the U.S. home improvement chain beat quarterly profit estimates.
Volume on U.S. exchanges was 12.62 billion shares, compared with the 11.09 billion average for the full session over the last 20 trading days.
Advancing issues outnumbered decliners on the NYSE by a 9.80-to-1 ratio; on Nasdaq, a 3.59-to-1 ratio favored advancers.
The S&P 500 posted 45 new 52-week highs and no new lows; the Nasdaq Composite recorded 106 new highs and 139 new lows.